INVESTMENT BANKING

Shairen Ann S. Ganal

MBA Student
WHAT IS AN INVESTMENT BANK?
 An Investment Bank is a financial intermediary that
performs a variety of services .
 help companies and governments and their

agencies to raise money by issuing and selling

securities in the primary market.
 as well as in providing strategic advisory services

for mergers, acquisitions and other types of

financial transactions.
 investment banks also have retail operations that

serve small, individual customers

MAJOR FUNCTIONS OF INVESTMENT
BANKS
MERGERS & ACQUISITIONS
MERGERS & ACQUISITIONS
 Acquisition:

 The stock of the acquiring company continues to be traded.

 Merger:

 Both companies' stocks are surrendered and new company stock is

issued ainpurchase
Whether its place.
is considered a merger or an acquisition really depends on
whether the purchase is friendly or hostile and how it is announced. In other words,
the real difference lies in how the purchase is communicated to and received by the
target company's board of directors, employees and shareholders. It is quite normal
though for M&A deal communications to take place in a so called 'confidentiality
bubble' whereby information flows are restricted due to confidentiality agreements
ORGANIZATIONAL STRUCTURE OF
INVESTMENT BANKING
INVESTMENT MANAGEMENT
 The professional management of various securities and
other assets (e.g. real estate), to meet specified
investment goals for the benefit of the investors.
Investors may be institutions or private investors.
SALES AND TRADING
 is often the most profitable area of an investment bank.
 responsible for the majority of revenue of most
investment banks

RESEARCH
is the division which reviews companies and writes
reports about their prospects, often with "buy" or "sell"
ratings. While the research division generates no
revenue, its resources are used to assist traders in trading
RESEARCH
 Intermediaries between companies and the buy-side, corporate finance and sales and
trading, research analysts form the hub of investment banks.
 Analysts produce research ideas.

 Managers of research reports and

the experts on their industries to the

outside world.
 Research analysts appear to be statisticians, it
often comes closer a diplomat or salesperson.

Corporate finance bankers press research analysts to be banker-friendly. Salespeople

yearn for new stock ideas they can use to solicit trades from clients. Investors demand
that research analysts write unbiased research, while companies wish for the best
rating possible. Although within the department, research is often less political than
corporate finance, those in research face more external pressure than any other
area in investment banking.
MIDDLE OFFICE

Risk Management - involves analyzing the market and credit risk

that traders are taking onto the balance sheet in conducting their
daily trades, and setting limits on the amount of capital that they are
able to trade in order to prevent 'bad' trades having a detrimental
effect to a desk overall.

Internal Control- tracks and analyses the capital flows of the firm
Corporate treasury – responsible for an investment bank’s funding,
capital structure mgt, and liquidity risk monitoring
BACK OFFICE
Operations involves data-checking trades that have been
conducted, ensuring that they are not erroneous, and
transacting the required transfers.

Technology
Every major investment bank has considerable
amounts of in-house software, created by the Technology
team, who are also responsible for Computer and
Telecommunications-based support. Technology has
changed considerably in the last few years as more sales
and trading desks are using electronic trading platforms.
CORPORATE FINANCE
TRANSACTIONS
 Equity Offerings
 Initial Public Offering (IPO)

 Secondary Market Offering (SEO)

 Mergers and Acquisitions

 Takeover
 Leverage

 Leveraged Buyouts

 Bond Offering
INITIAL PUBLIC OFFERING
 An IPO is the process by which a private company transforms
itself into a public company. The company offers, for the first
time, shares of its equity (ownership) to the investing public.
These shares subsequently trade on a public stock exchange
 Why IPO?

 to raise cash to fund the growth

 cash out partially or entirely by selling ownership

 to diversify net worth

 Concerns:

 Firms that are too small, too stagnant or have poor growth
prospects will - in general - fail to find an investment bank
willing to underwrite
PROS AND CONS OF AN IPO
Advantages
 Stronger Capital Base
 Increases Financing
prospects
 Better situated for
acquisitions
 Owner Diversification
 Executive Compensation
 Increase company prestige
Disadvantages
 Short-term growth pressure
 Disclosure and
Confidentiality
 Restrictions on Management
 Trading Restrictions
INITIAL PUBLIC OFFERING PROCESS
THE SYNDICATE
Vital link between salespeople and corporate finance. Syndicate exists
to facilitate the placing of securities in a public offering, a knock-
down drag-out affair between and among buyers of offerings and
the investment banks managing the process. In a corporate or
municipal debt deal, syndicate also determines the allocation of
bonds.
PRICING OF AN IPO
 Lead managers help to decide on an appropriate price at which the
shares should be issued.
 There are two ways in which the price of an IPO can be determined:
 the company, with the help of its lead managers, fixes a price or
 the price is arrived at through the process of book building.

Book Building is a process to aid price and demand discovery. It is a mechanism

where, during the period for which the book for the offer is open.
The issue price is determined after the bid closure based on the demand
generated in the process. In case of oversubscription the greenshoe (over-allotment)
option is triggered. It can vary in size up to 15% of the original number of shares
offered
TIME LINE FOR AN IPO
FEES OF AN IPO
 The price paid to the issuer is known as the underwriting
proceeds. The spread between the POP (Public
Offering Price ) and the underwriting proceeds is split
into the following components:
 Manager's Fee - (10% - 20% of the spread)

 Underwriting Fee - (20% - 30% of the spread)

 Selling Concession - (50% - 60% of the spread)

SECONDARY MARKET OFFERING
(SEO)
 A follow-on offering or SEO is an issuance of stock subsequent to the company's
IPO. A SEO can be either of two types (or a mixture of both): dilutive ("new" shares
) and non-dilutive ("old" shares ) (as rights issue). Furthermore it could be a cash
issue or a capital increase in return for stock.

 Market Reaction: What happens when a company announces a secondary offering

indicates the market's tolerance for additional equity. Because more shares of stock
"dilute" the old shareholders, the stock price usually drops on the announcement of
a SEO. Dilution occurs because earnings per share (EPS) in the future will decline,
simply based on the fact that more shares will exist post-deal. And since EPS drives
stock prices, the share price generally drops.
BOND OFFERINGS
 The reasons for issuing bonds rather than stock are various. Perhaps the stock
price of the issuer is down, and thus a bond issue is a better alternative. Or perhaps
the firm does not wish to dilute its existing shareholders by issuing more equity.
These are both valid reasons for issuing bonds rather than equity. Sometimes in
down markets, investor appetite for public offerings dwindles to the point where
an equity deal just could not get done (investors would not buy the issue).
 The bond offering process resembles the IPO process. The primary difference lies

in:
(1) the focus of the prospectus (a prospectus for a bond offering will emphasize the
company's stability and steady cash flow, whereas a stock prospectus will usually
play up the company's growth and expansion opportunities), and
(2) the importance of the bond's credit rating (the company will want to obtain a
favorable credit rating from a debt rating agency, with the help of the credit
department of the investment bank issuing the bond; the bank's credit department
will negotiate with the rating agencies to obtain the best possible rating). Clearly, a
firm issuing debt will want to have the highest possible bond rating, and hence pay
a low interest rate.
M&A ADVISORY SERVICES
 M&A advising is highly profitable, and there are many
possibilities for types of transactions.
 Perhaps a small private company's owner/manager wishes to sell

out for cash and retire.

 Or maybe a big public firm aims to buy a competitor through a

stock swap.
 Whatever the case, M&A advisors come directly from the

corporate finance departments of investment banks.

 Unlike public offerings, merger transactions do not directly

involve salespeople, traders or research analysts.

 In particular, M&A advisory falls onto the laps of M&A

specialists and fits into one of either two buckets: seller

representation or buyer representation (also called target
representation and acquirer representation).
LEVERAGED BUYOUTS

A leveraged buyout
- occurs when a financial sponsor acquires a controlling interest in a company's
equity and where a significant percentage of the purchase price is financed
through leverage (borrowing).

• The bonds or other paper issued for leveraged buyouts are commonly
considered not to be investment grade because of the significant risks
involved.
WHY LBO?
1) The investor itself only needs to provide a fraction of the capital for the
acquisition
2) Assuming the economic internal rate of return on the investment exceeds the
weighted average interest rate on the acquisition debt, returns to the financial
sponsor will be significantly enhanced.
As transaction sizes grow, the equity component of the purchase price can be
provided by multiple financial sponsors "co-investing" to come up with the needed
equity for a purchase. Likewise, multiple lenders may band together in a "syndicate"
to jointly provide the debt required to fund the transaction.

As a percentage of the purchase price for a LBO target, the amount of debt used to finance a
transaction varies according the financial condition and history of the acquisition target, market
conditions, the willingness of lenders to extend credit as well as the interest costs and the ability
of the company to cover those costs. Typically the debt portion of a LBO ranges from 50%-85%
of the purchase price, but in some cases debt may represent upwards of 95% of purchase price.
Between 2000-2005 debt averaged between 59.4% and 67.9% of total purchase price for LBOs
in the United States.
BASIC STRUCTURE OF A LBO
TRANSACTION
SALES & TRADING
SALES
 Institutional Sales: manages the bank's relationships with institutional money managers such
as mutual funds or pension funds. It is often called research sales, as salespeople focus on
selling the firm's research to institutions.
 Retail Brokerage (account executives, financial advisors or financial consultants ): involves
managing the account portfolios for individual investors - usually called retail investors.
Brokers give advice to their clients regarding stocks to buy or sell, and when to buy or sell
them.
 Private Client Services (PCS): A cross between institutional sales and retail brokerage, PCS
focuses on providing money management services to extremely wealthy individuals.
 The Sales-trader: A hybrid between sales and trading, sales-traders essentially operate in a
dual role as both salesperson and block trader. sales-traders typically cover the highlights and
the big picture and they speak to the in-house traders of the buy-side. When specific
questions arise, a sales-trader will often refer a client to the research analyst.

Sales is a core area of any investment bank, comprising the vast majority of people
and the relationships that account for a substantial portion of any investment banks
revenues.
THE ROLE OF SALES IN AN IPO
Sales people help place the offering with various money managers.

IPOs typically cost the company going public

That 7 percent is divided:

• 60 percent to Sales

• 20 percent to Corporate Finance

• 20 percent to Syndicate
TRADING
TRADING
 Market Making: both a buy and a sell price in a
financial instrument, hoping to make a profit on the
bid/offer spread.
 Execution/Broker: Execution-only, which means that

the broker will only carry out the client's instructions to

buy or sell.
 Proprietary Trading: firm's traders actively trade

financial instruments with its own money as opposed to

its customers' money, so as to make a profit for itself
(riskier and results in more volatile profits).
IMPORTANCE OF TRADING
Sales people provide the clients for traders, and traders provide the products for
sales. Traders would have nobody to trade for without sales, but sales would have
nothing to sell without traders.
Understanding how a trader makes money and how a sales person makes money
should explain how conflicts can arise.

Trading can make or break an investment

bank. Without traders to execute buy
and sell transactions, no public deal
would get done, no liquidity would
exist for securities, and no
commissions or spreads would accrue
to the bank.
THANK YOU!